BILL ANALYSIS AB 3 X3 Page 1 ( Without Reference to File ) CONCURRENCE IN SENATE AMENDMENTS AB 3 X3 (Evans) As Amended February 19, 2009 2/3 vote. Urgency ----------------------------------------------------------------- |ASSEMBLY: | |(January 12, |SENATE: | |(February 19, | | | |2009) | | |2009) | ----------------------------------------------------------------- (vote not relevant) (vote not available) Original Committee Reference: RLS. SUMMARY : Enacts revenue raising provisions necessary to implement the Special Session Budget Agreement. The Senate amendments delete the Assembly version of this bill. Specifically, the provisions of the Senate amendments are as follows : 1)Increases, temporarily, the rate of the General Fund (GF) portion of the state Sales and Use Tax (SUT) by 1%--from the current rate of 5% to a rate of 6%. The increase would be effective starting April 1, 2009. The rate increase will sunset on June 30 of either 2011(about 2 years) or 2012 (about 3 years), with the longer period contingent on voter approval of the proposed Budget Stabilization constitutional amendment. 2)Increases, temporarily, the rate of the vehicle license fee (VLF) from the current rate of 0.65% to a rate of 1.15%, except for commercial vehicles with a gross weight of 10,000 pounds or more. Revenue from the portion of the increase from 0.65% to 1% will be retained by the GF ($121 million in 2008-09 and $1.2 billion in 2009-10) and revenue from the additional increase of 0.15% will be transferred to a newly created Local Safety and Protection Account, which is continuously appropriated for specific local public safety programs ($82 million in 2008-09 and $502 million in 2009-10). The VLF rate increase will become effective for registrations beginning May 19, 2009 (corresponding to the timing of a weekly VLF billing cycle) and expire June 30, 2013 if the voters approve the proposed Budget Stabilization AB 3 X3 Page 2 constitutional amendment. If the voters reject the amendment, both components of the rate increase will expire two years sooner-June 30, 2011. Starting in 2010, the Director of Finance must determine by January 10 and upon enactment of the annual budget, whether any of the money derived from the 0.15% rate component have been allocated by the state for other purposes. In the event of an affirmative determination, collection of the 0.15% rate component would be suspended until the director determines that purpose of the allocations has been restored. 3)Rolls back the dependent credit amount under the Personal Income Tax (PIT). Currently, taxpayers are allowed a non-refundable personal credit of $99 (which applies to the taxpayer and their spouse or domestic partner if filing a joint return) and a dependent credit of $309 (for children and other dependents) on their tax returns for 2008. These credits are phased out for high income taxpayers, and are indexed to inflation each year. This measure temporarily reduces the dependent credit to the size of the personal credit for tax years 2009 through 2012. However, the higher tax rate would end two years earlier (after tax year 2010) if the voters reject the Budget Stabilization constitutional amendment. Subsequent to 2012 (or 2010), the dependent credit will revert to the size it would have been had current law not been changed (the current $309 as adjusted for inflation). For a taxpayer with two dependents, the smaller exemption credit will raise tax liabilities by $420. 4)Adds an additional rate component to each personal income tax rate. The add-on rates will be in effect for tax years 2009 through 2012. However, the higher rates would end two years earlier (after tax year 2010) if the voters reject the Budget Stabilization constitutional amendment. This rate increase will equal either: a) An increase of 0.25 percentage point to each marginal tax rate if the Director of Finance determines that funds from the federal stimulus package which can be used to offset GF expenditures are less than $10 billion; or, b) An increase of 0.125 percentage point to each marginal tax rate if the Director of Finance determines that funds from the federal stimulus package which can be used to offset GF expenditures are at least equal to $10 billion. AB 3 X3 Page 3 This bill also makes an equivalent temporary change to the PIT Alternative Minimum Tax (AMT) rate-adding either 0.125% or 0.25% to the current rate of 7.0%. The AMT is figured on income after adding back in certain types of deductions and preference items. Taxpayers pay either their regular tax or the AMT, whichever is higher. 5)Includes an urgency clause. FISCAL EFFECT : The overall fiscal effect of this measure through 2009-10 is to increase revenues by a cumulative total of between $11.1 billion (if sufficient savings from federal funds occur) and $13.0 billion (if federal funds savings fail to meet the $10 billion threshold). Over the total five-year period shown, estimated cumulative total revenues vary from $32.3 billion to $37.2 billion, depending on the federal funds savings (assuming voters approve the Budget Stabilization constitutional amendment). The specific fiscal effects of the provisions are shown in the table below. General Fund Revenue Impact of SB 3 X3 (Millions of dollars) ------------------------------------------------------------- |Tax Provision |Effective |2008-0|2009-1|2010-1|2011-1|2012-| | |Date a |9 |0 |1 |2 |13 | AB 3 X3 Page 4 | | | | | | | | |---------------+-----------+------+------+------+------+-----| |Sales |April 2009 |$1,203|$4,553|$4,792|$5,195|-$164| |tax:1-cent |through | | | | | | |increase |June 2012 | | | | | | |---------------+-----------+------+------+------+------+-----| |VLF rate |May 2009 | 264| 1,213| 1,238| 1,263|1,187| |increase to 1% |through | | | | | | | |June 2013 | | | | | | |---------------+-----------+------+------+------+------+-----| |VLF: 0.15% |May 2009 | 111| 509| 518| 529| 496| |rate increase |through | | | | | | |for local law |June 2013 | | | | | | |enforcement | | | | | | | |---------------+-----------+------+------+------+------+-----| |PIT .25% rate |Tax years | | 3,658| 2,454| 2,526|1,147| |surcharge |2009 | | | | | | |(federal funds |through | | | | | | |threshold not |2012 | | | | | | |met | | | | | | | |---------------+-----------+------+------+------+------+-----| | PIT .125% |Tax years | | 1,829| 1,227| 1,263| 574| |rate surcharge |2009 | | | | | | |(federal funds |through | | | | | | |threshold met) |2012 | | | | | | |---------------+-----------+------+------+------+------+-----| |PIT dependent |Tax years | | 1,440| 1,227| 1,181| 670| |credit |2009 | | | | | | |reduction |through | | | | | | | |2012 | | | | | | |---------------+-----------+------+------+------+------+-----| | | | | | | | | ------------------------------------------------------------- -------------------------------------------------------------------------------------------------------- |Totals: | | | | | | | -------------------------------------------------------------------------------------------------------- | Assuming | | $1578| $11,373| $10,229| $10,694| $3,336| |0.25% rate | | | | | | | |surcharge | | | | | | | |--------------+--------------+--------------+--------------+--------------+--------------+--------------| | Assuming | | $1,578| $9,544| $9,002| $9,431|$2,763 | |0.125% rate | | | | | | | |surcharge | | | | | | | -------------------------------------------------------------------------------------------------------- AB 3 X3 Page 5 a All dates are contingent on voter approval in 2009 of a Constitutional Amendment relating to budget stabilization and reform. Absent such approval, the provisions sunset 2 years earlier than shown, as noted in the descriptions of the individual provisions above. COMMENTS : 1)Existing law imposes a sales or use tax on the sale or use in this state of tangible personal property, absent a specific exemption. The combined sales tax rate in California currently ranges from 7.25% (for counties with no optional transactions and use taxes) up to 9.25% (for the City of South Gate in Los Angeles County). The combined rate consists of a state GF rate of 5%, statewide special fund rates totaling 1.25%, a local tax rate of 1%, and local optional rates. Sales and use taxes, as general taxes on consumption, are generally considered to be more regressive than some other taxes, such as California's personal income tax, since purchases of taxable goods absorb a larger portion of the income of lower-income taxpayers than of higher-income taxpayers. Also, some researchers have asserted that significant increases in sales taxes can have negative impacts on spending and the economy. However, given the imperative of a balanced budget and the magnitude of the current budget shortfall, the economic effects of a sales tax rate increase cannot be considered in a vacuum, but must be weighed against the effects of other additional spending reductions or tax increases. 2)The VLF is a state tax levied on the purchase price of a vehicle, and subsequently annually assessed against the vehicle's value adjusted by a statutory depreciation schedule. Proposition 1A, approved by the voters in November 2004, requires that VLF revenue from the existing 0.65% rate be allocated to support local health, mental health, and social services costs under Realignment or otherwise allocated to local government. However, the Legislature may increase the VLF rate, and there is no restriction on the use of the additional revenue. 3)Dependent exemption credits are usually justified on the grounds that taxpayers who raise children or care for others incur extra expenses and therefore have less disposable income AB 3 X3 Page 6 from which to pay taxes. The amount of the credit, however, has varied considerably over the past 30 years, and according to the Legislative Analyst's Office, there is no consensus on how large the credit should be. Prior to 1987, the dependent credit was roughly one third the size of the personal credit, and from 1987 through 1997, the dependent and personal credits were the same. The larger dependent credit currently in effect is the result of legislation passed in 1997, which tripled the dependent credit amount starting in 1998. This bill temporarily restores the equivalence of the personal and dependent credit that was in effect prior to 1998. 4)Existing law imposes a state personal income tax (PIT) and provides for six graduated PIT tax rates of 1%, 2%, 4%, 6%, 8%, and 9.3%, with an additional 1% Mental Health Tax on taxable income over $1 million (Proposition 63, 2004). This measure adds an additional rate component to each PIT rate, equal to either 0.125 percentage point or 0.25 percentage point depending on the status of federal funds. Assuming the 0.25 percentage point increase is in effect, the temporary rates would range from 1.25% to 9.55%. This will increase tax liabilities by either 0.25% or 0.125% of taxable income-in effect slightly flattening the current progressive tax rate structure, but also making PIT revenues slightly less volatile. As an illustration of the impact on taxpayers, the 0.25% surcharge would result in additional state taxes of about $125 for taxpayers filing jointly with $50,000 in taxable income, $250 for taxpayers filing with $100,000 in taxable income, and $1,250 for taxpayers filing jointly with $500,000 in taxable income. In addition, the rate increase at the lowest brackets will result in tax liabilities for some persons who currently have none. This is because some taxpayers whose tax liability currently is fully offset by the personal and dependent credits will now have tax liabilities that somewhat exceed the credits (and because this measure also reduces the amount of the dependent credit). Since state personal income taxes can be taken as itemized deductions on federal returns, the net impact of the surcharge may be reduced by as much as one third for some taxpayers. AS PASSED BY THE ASSEMBLY , this bill expressed the intent of the Legislature to make statutory changes related to the Budget of 2008. AB 3 X3 Page 7 Analysis Prepared by : Daniel Rabovsky/ BUDGET/ (916) 319-2099 FN: 0000167